Category Economy
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A lack of interest?

23 November 2004 Angelo Coppola

Paul Stewart, head of retail asset management at m Cubed Holdings says that inflation has shrunk to levels last seen in the 1960’s and the value of our currency has recovered and stabilised in the forex market.

As a result of these dramatic improvements interest rates have fallen to lower levels than we have been accustomed to, and the risk of the large and devastating economic cycles of the 1980’s and early 1990’s has reduced significantly.

The good news as far as interest rates are concerned, is that given the current inflation environment and the stable rand, its is unlikely that we are going to see significant increases in interest rates in the months ahead.

Moreover, we can expect the cycles of rate hikes and cuts to be somewhat more muted than in previous cycles, facilitating more efficient capital planning while the assumption and servicing debt should be more manageable.

But is it this area debt servicing that I urge consumers to just be very cautious.

If one looks at the levels of consumer spending currently, the consumer is buoyant and fearless. They have been encouraged to spend through rising levels of disposable income driven by cheap debt, significant tax relief and above inflation salary hikes.

The financial system is awash with liquidity. Every bank is trying to lend you money to buy a new car, credit cards are easily obtainable and retailers are offering credit to buy clothes and furniture on excellent terms. The property market is booming encouraging investors to buy second and third properties on debt with small deposits.

People should be a little cautious as the interest rate cycle may start to turn in the months ahead as inflation starts to creep upwards.

Some modest interest rate increases may therefore be required to cool off the over-heated economy at some point during 2005. It is always wise when making large purchases that carry long-term financial obligations, to be conservative in one’s budgeting and planning.

With interest rates currently at 11% you may have assumed so much bank credit that you can only just afford repayments based on your current income level. My advice is be certain to build in a safety margin so that if interest rates do rise by 2% to 13% and your monthly repayment increase, you are still be able to comfortably pay this debt off.

As an investment professional, I would also say that one of the best investments anybody can make over time is to get rid of their debt, as this effectively provides an effective after tax return of the same magnitude as the interest rate payable on that debt.

Rather than using your Christmas bonus or 13th cheque and buying unnecessary items, take 70% of it and reduce any outstanding debt, which you may have. This may include you credit card, bond, or motor vehicle financing.

This debt reduction has an enormously positive long-term impact on your finances by reducing the term of your debt contracts and could potentially save you thousands in interest payments.

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